Wells Fargo Earns New Ire from Bank Overseers

Banking regulators have grown increasingly disenchanted with Wells Fargo & Co. and in mid-2017 downgraded one part of a secret assessment of the bank's health and strength, according to people familiar with the decision.

The assessment -- known as a bank's CAMELS score -- ranks a firm on a variety of measures including capital, management and liquidity. The scores are confidential and can affect the level of insurance payments a bank must make as well as the level of regulatory oversight of a firm.

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The reduction in the management component of Wells Fargo's CAMELS score, which hasn't been previously reported, reflected concerns about Wells Fargo's management and its ability to manage risk, the people familiar with the decision said.

The downgrade occurred as Wells Fargo continued to grapple with issues related to how it treats customers. Improper sales practices resulted in potentially 3.5 million accounts opened without customers' knowledge, while more than 550,000 auto-loan and mortgage customers were potentially overcharged for products.

Regulators' concerns focus on the bank's overall approach to catching and preventing problems that can harm customers.

The Office of the Comptroller of the Currency has been weighing a new enforcement action against the bank related to such risk controls, according to people familiar with the matter. A decision could be made in coming weeks and is likely to result in an enforcement action, these people said. If this happens, Wells Fargo may also be required to pay tens of millions of dollars as part of any settlement, one of these people said.

A Wells Fargo spokeswoman declined to comment on the bank's CAMELS rating or any potential OCC actions.

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The spokeswoman said the bank is "very focused on prudent and effective risk management" and continues to enhance those matters. She cited the bank's work to centralize risk-management functions for better oversight; create a conduct-management office to protect employees and customers; and build centers of excellence in areas like testing and validation.

An OCC spokesman declined to comment on "supervisory matters pertaining to any specific institution."

The possibility of a regulatory sanction follows months of back and forth between the bank and the OCC over how Wells Fargo assesses risks, according to people familiar with the process. During that time, Wells Fargo has had to bring in an outside consultant to try to revamp its procedures and has had to undo some structural changes made in response to the revelation of the sales-practices scandal in September 2016.

That scandal led to an enforcement action with regulators and kicked off a public and political firestorm around the bank. It also prompted Wells Fargo to examine its businesses and practices, which led last year to the disclosure of additional problems related to auto-loan and mortgage charges to customers. The bank is in the process of refunding more than $100 million to customers.

The issues continue to weigh on the bank in a variety of ways. In 2017, Wells Fargo was the worst performing of the biggest U.S. banks; its shares rose 10%, 6 percentage points below the performance of the KBW Bank Index and 9 percentage points below that of the S&P 500.

In addition, Wells Fargo continues to make changes to its management. The bank recently pushed out regional executive John Sotoodeh. He had led Wells Fargo's retail-banking business in the Los Angeles area during a time several years ago when questionable employee behavior was rampant, according to people familiar with the matter.

Tracy Kidd, who led human resources for the retail bank, and Deanna Lindquist, who was head of the legal department's employment group, are also no longer with the bank, these people said.

The now-former executives didn't respond to requests for comment.

Another Wells Fargo spokeswoman confirmed the individuals no longer work for the bank.

For regulators, the number and scope of problems within different areas of the bank and the difficulty its management has had in addressing them suggest problems at the core of the way Wells Fargo manages risk, people familiar with the concerns said.

In mid-2017, the OCC downgraded one element in Wells Fargo's CAMELS rating, according to people familiar with the rating. The M component of this rating, which stands for Management, was downgraded to a 3 from a 2, some of these people said. The ratings are ranked on a scale from 1 to 5, with 5 being the worst.

The downgrade to a 3 signifies that oversight "needs improvement," based on factors including the sales-practices scandal and problems in the auto-lending and mortgage businesses, the people said. The 2 rating had indicated "satisfactory management."

The adjustment also included a downgrade of the bank's credit-risk rating to "insufficient" in late 2016due to a lack of policies, procedures and documentation, one of the people said.

It isn't publicly known whether the bank's composite CAMELS rating moved up or down in the past year. But the management-category rating "is given special consideration when assigning a composite rating," according to OCC guidelines.

One particular point of contention for regulators was that issues related to risk management that resulted in formal warnings to the bank hadn't been resolved, the people familiar with the decision said. Scrutiny over these issues escalated in mid-November when the OCC sent the bank's board a letter warning of a formal enforcement action known as a consent order, and cited the risk-management problems.

Wells Fargo responded to the OCC's letter in early December, detailing changes it has made in the past year, The Wall Street Journal reported.

The problem for the OCC, people familiar with the matter said, relates to the way the bank's corporate arm manages and oversees potential risks in individual businesses.

Regulators believe that Wells Fargo, which for years had operated through a fairly decentralized structure, failed to build such a functioning line of defense, people familiar with the matter said.